In our life we may face some unforeseen event such as Job Loss, Salary cut, Medical emergency or Automobile repair etc. which can be challenging if we are not financially sound or not have enough fund for such situations. For such situations we should have emergency fund so that our life go smoothly even in such challenging times. Below are the few points which will help you build emergency fund.

Importance of Emergency Fund

Life is full of surprises, some are good and some are bad surprises. However, we can not control all the situations but if we have enough cash in hand then we can easily deal with most of the situations nicely and calmly. One of the recent example is Covid Pandemic in which many people lost their jobs and many of them were not prepared for hospitals bill during such tough time.

An Emergency Fund act as a safety net during such critical times and help you and your family afloat during financial needs so that you don’t have to rely on credit cards or loans. An Emergency Fund can help you avoid taking additional loans (if you already have some that you are paying off).

How much Emergency Fund one should have?

It depends on individual to individual basis as each individual has unique combinations of their and their dependents lifestyle, income and expenses. Hence this figure will be different for different person. But ideally emergency fund should be three to six times of your monthly income. Considering the current situations, most people will agree that six months of living expenses should be kept aside as emergency fund. So that, your life is not badly impacted in case of Job loss or any other unforeseen event.

Emergency Funds can be categorized into below two categories:

1. Long-Term Emergency Fund : A long term emergency fund is intended to cover the financial need for prolonged unexpected situations e.g. Job loss, Medical issues or some other major life disrupting event. This fund should be larger in size so that you can sustain for several months or may be even year in some extreme tough situation.
2. Short-Term Emergency Fund : On the other hand a short term emergency fund is smaller in size and for smaller and immediate financial setbacks e.g. Car automobile repair, short term medical treatment, or some sudden unavoidable travel plans.

Have to Save for an Emergency Fund?

Once you have identified the amount needed for various emergency needs e.g. Long-Term and Short-Term emergency situation then next comes the steps how to save enough fund. Below are the some steps which will help you build enough fund to support you in aforementioned emergency situations:

1. Create Budget : Analyse your monthly income and expenses and the areas where you are spending money. Then identify your needs and wants. Then understand your spending behaviour and control spending on things that you do not need in immediate future may be you are purchasing few things which you really don’t need e.g. impulsive buying of things.
2. Automate Saving : Saving is the most important point while building a fund. A small amount saving on regular basis can build a big corpus. So, don’t hesitate to save even small amount and best way to do that is setting some automatic transfer of fund from your salary account in some other saving account which you do not access frequently.
3. Set Withdrawal Rules : Set some strict guidelines on withdrawal from this emergency saving account. Never withdraw any amount unless it fall in category of emergency need e.g. Loss of Job, Medical expenses or some unavoidable travel (not for fun travel). Otherwise it will be difficult or take time to save enough for match the emergency needs.
4. Inform family members : Emergency situations comes suddenly, so it is better to inform the family members about the emergency fund so that in case you are not there they can withdraw or use fund from that account.
5. Review fund and increase overtime : The fund you have saved today may not be sufficient after few years because of some additional expenses which may have come in later stage of your life e.g. child education, some loan etc. . So, you should review your fund and make sure that have enough amount in emergency fund to meet the requirement of your latest situations.